Line of credit and credit cards are similar types of revolving credit that allow you to borrow a certain amount of funds that you can use for business relates expenses or equipment financing. However, even though they are very similar, they still have their own advantages and disadvantages and a better suited for some purposes than others.
If you narrowed down your options to these two types of loans, you have definitely made a wise choice, and we are sure you will be satisfied either way. But there are some important differences between credit cards and lines of credit you should know before you make the final decision, and you can find all of them in the article below.
Line of Credit (LOC)
This is a flexible type of loan. It is a set sum of money that you can use as needed to cover business expenses within a predetermined time frame. The moment you utilize the money, interest starts to accrue, just like with many other types of loans. Although interest rates, or APRs (annual percentage rates), for lines of credit vary depending on the repayment terms, they are often lower than credit card APRs.
LOCs provide immediate access to money and are a fantastic choice for independent contractors, consultants, and people with irregular monthly revenue. To apply for a line of credit, you must visit a physical bank, much like you would for a loan. However, LOCs have lower interest and APR rates when compared to loans. Since many LOCs lack collateral, they can often be funded without it. Make sure to repay on time whatever sort of credit you choose to take on because they can lower your credit score.
Drawbacks- Lines of credit might not be the ideal source of credit for everyone. LOCs are not tax deductible. Therefore, if you do take one, it would be wise to repay the loan as soon as possible rather than using it as a continuous source of funding. Additionally, getting authorized for a LOC is more difficult if you have little to no credit history.
Credit Card
Personal and business credit cards share many similarities. The main distinction between the two is that the business ones can only be used for business purposes. A corporate credit card has annual fees and interest rates that start as soon as you activate and use it, just like a personal credit card does.
Similar to a LOC, you can use the money as you see fit, but there is a spending cap. Business credit cards are far more accessible than other types of business loans. Business cards can be applied for, authorized, and sent right to your office without needing to visit a physical bank. You can even apply for a secured card if your credit history is less than ideal for reducing the danger of payment default.
The incentives or bonuses are probably a company credit card's best benefit. You can utilize your points for business trips, conferences, trade exhibits, and other events while also earning cash back and airline or hotel rewards.
Drawbacks- Although corporate credit cards might appear to be the greatest choice, they do have certain disadvantages. Security problems can arise from using credit cards, such as employees abusing their access to funds and a higher likelihood of fraud.
Final decision
No form of funding is fundamentally harmful however, in the end, it all depends on how it is used. LOCs may be more challenging to get, and if not promptly repaid, they may wind up costing the account holder extra money over time. Even those with little to no credit history can far more easily obtain credit cards. On the other hand business owners that choose credit cards can experience a higher risk of fraud.
When choosing between a line of credit and a business credit card, take into account how quickly you require the financing. It might be worthwhile to improve your relationship with your bank if you have the time to pursue a LOC. Its speed and simplicity make it the best option.
CopyScape: https://prnt.sc/0bVXO05gakkb
Posts
